Adjustable-Rate Loan Surge Helped Wamu, Golden West

Amid an industrywide downturn in single-family residential loans, Washington Mutual originated $8.6 billion of adjustable-rate loans in the third quarter, up 19% from the second quarter, and 87% from the same period a year earlier. Single-family residential loan originations were $10 billion, up from $9.66 billion a year earlier. Of those loans, 86% were adjustable-rate mortgages, up from 48% for the same period in 1998.

"Washington Mutual is now clearly the nationwide ARM lender of choice," said Bruce Harting, an analyst for Lehman Brothers, in a research note. The resurgence in ARM volume has meant a temporary margin squeeze, he said, because the loans usually give borrowers a temporary low rate for the first few months. Still, the ability to make adjustable-rate loans helped Washington Mutual beat analysts' expectations by a penny, with 84 cents a share of earnings.

Golden West Financial also experienced a decline in margin, but beat the analyst consensus by 6 cents with earnings per share of $2.14 in the third quarter. Golden West made $3.6 billion of mortgages, a 4.7% increase from the second quarter and a 65% increase over the third quarter of 1998. Adjustable-rate mortgages accounted for 94.5% of the loans, up from 82% for the same period last year, Mr. Harting said.

The results underscore the advantage Washington Mutual and Golden West have over mortgage bankers in a rising interest rate environment: Thrifts typically hold on to their adjustable-rate loans, rather than sell them.

Washington Mutual has not changed its market strategy but is benefiting from its position as a portfolio lender, said Craig S. Davis, president of its mortgage banking and financial services group. Wamu retains nearly all of its adjustable-rate loans and sells most of its fixed-rate loans to Fannie Mae, he said.

"Our focus is to be able to help borrowers in all market conditions," Mr. Davis said. "Whatever rates do, we can do either portfolio lending, or we're a very aggressive mortgage banker in a time when the fixed-rate mortgage may be more in vogue."

"This is the environment where we excel the most in terms of being able to add organically to our balance sheet," said Marangal I. Domingo, chief financial officer for Wamu's mortgage banking group.

Mr. Davis said the "option ARM" is Wamu's most popular product with consumers. A consumer starts off with either a one-month or a three-month "teaser rate" of 4.5% before the loan becomes fully indexed at about 7.5%, he said. This product gives borrowers several payment rate options.

Wamu's national expansion has also been a "big contributor" to the overall volume numbers as the growth has resulted in "significant increases in our market share," he said.

The adjustable-rate resurgence is also affecting the mix of loans for smaller portfolio lenders. ARMs are accounting for about half the originations by Quaker City Savings and Loan Association, according to Rick McGill, president and chief executive officer of the Whittier, Calif., thrift.

"The volume of adjustable-rates has not picked up all that much. What's happened is the volume of fixed-rates has collapsed," he said, adding that single-family origination volumes are down nearly 75%, largely because the refinancing business is gone. But in California, Mr. McGill said, the resale housing market is still hot, driven by "huge demand for homes."

Mortgage banks, which typically have trouble competing with thrifts when rates are rising, may find a more receptive secondary market for adjustable-rate loans this time around.

Both Fannie Mae and Freddie Mac dramatically increased their purchases of adjustable-rate mortgages in September. Freddie Mac bought $3.5 billion of adjustable-rate mortgages in September, up from $1.9 billion in August and $910 million in September of last year.

Frank Nothaft, deputy chief economist for Freddie Mac, said Freddie has changed its portfolio mix to reflect an increase in adjustable-rate loans' share of the conventional single-family market, to 30% in August, from 8% in October 1998.

Fannie Mae bought $1.6 billion of ARMs in September, up from $454 million in September 1998. Jayne J. Shontell, senior vice president for investor relations, said that about a third of the ARMs Fannie is purchasing are "the longer fixed-period ARMs," -- loans that are fixed for five, seven, or 10 years and then become adjustable.

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